FILE PHOTO: Chinese national flags flutter near a steel factory in Wu'an
Thomson Reuters
By Soyoung Kim and Paritosh Bansal

DAVOS, Switzerland (Reuters) - China's state-owned enterprises will face more mergers and bankruptcies as the government overhauls the lumbering state sector, the head of the country's state asset regulator told Reuters.

In a rare interview with a foreign news outlet, Xiao Yaqing, chairman of the State-owned Assets Supervision and Administration Commission (SASAC), stressed Beijing's commitment to streamline its bloated and debt-ridden state-owned sector and create conglomerates capable of competing globally.

China embarked on a revamp of its state-owned enterprises (SOEs) in 2015 to tackle rising corporate debt and also to make them more profitable and responsive to market forces.

It has claimed progress in its SOE restructuring through mergers, reductions in excess capacity, the relocation of workers, closure of "zombie" firms, and implementing a controversial scheme under which debt is converted into equity.

"Our wish is for them to be bigger, stronger and more efficient. And this is what they're about to be in the future," Xiao told Reuters on the sidelines of the World Economic Forum in Davos on Tuesday.

He said the focus would be to strictly separate government functions from the SOEs' business operations, though it was vital for the ruling Communist Party to retain control of the state sector during the process.

The number of enterprises administered by the central government has been reduced to 98 from 117 in 2012.

The merger of China's top coal miner, Shenhua Group Corp , and China Guodian Group Corp , among the country's top five state power producers, created the world's largest power utility worth $278 billion.

When asked about further SOE consolidation, Xiao said the number of central government-owned companies would continue to decrease through mergers in "a voluntary process", though the SASAC did not have a target for this reduction.

Xiao also pointed out the importance of the relocation of workers during the reforms, saying that SOEs, with the help from local governments, ought to create programs to absorb laid-off workers after consultation with them.

"We do not want them to be laid off or just fired in this process," he said. "We need them to be allocated into new positions."

PROFIT RECOVERY, CUTTING DEBT

Enterprises owned by China's central government reported robust growth in 2017, with total profit up 15.2 percent, the fastest in five years.

"We reduced a lot of 'zombie enterprises'. Now the management efficiency of the companies is significantly improved," he said.

The Communist Party's People's Daily reported this month that central government-owned SOEs had met their target of shutting 1,200 zombie enterprises by the end of last year.

Moreover, state-owned enterprises will target coal capacity cuts of 12.65 million tonnes in 2018, and will also aim to reduce excess capacity in coal-fired power, non-ferrous metals, shipbuilding and construction materials.

Xiao said SOEs' leverage is at "healthy levels", and bankruptcies and liquidation have only happened at second-tier companies, not at the holding group level.

SASAC has pledged to further lower debt ratios of central government-owned firms by another 2 percentage points by the end of 2020.

Xiao expects market-driven SOE bankruptcies to continue.

"As long as you're market player, you have your good times and you have your bad times, and sometimes you just go bankrupt," Xiao said.

STRENGTHENING PARTY CONTROL

As SOEs spearhead investment in infrastructure projects overseas under Beijing's Belt and Road initiative, the strengthened leadership of the Communist Party at SOEs is raising concerns that political factors will be prioritized.

The value of overseas assets held by China's centrally owned enterprises has exceeded 6 trillion yuan ($940 billion), with investments in more than 185 countries and regions.

While saying the government will slowly move to play a less direct role in the business operations of state firms, Xiao defended the Communist Party's control of the state sector.

Imposing party discipline on state firms remains a key part in choosing top management and in fighting graft at SOEs, he said, adding that he did not see any conflict of interest between state political goals and commercial interests of SOEs.

"SOEs are owned by the general public, which means everyone in this country is a shareholder. Then we need a representative, which is the Chinese communist party, to supervise and play a scrutiny role for the companies," Xiao said.

Xiao said that during his meetings with CEOs in Davos, business leaders had expressed strong interest in China, in working with its SOEs and in the future of SOE reforms.

"I can't tell you what the SOE sector will be in 10 or 20 years, but we do hope that SOEs could be exactly like other companies: they will have higher liquidity of their assets and respond more efficiently to market changes," Xiao said.

($1 = 6.3925 Chinese yuan renminbi)

(Reporting By Soyoung Kim and Paritosh Bansal in DAVOS, Switzerland; Writing by Shu Zhang in BEIJING; Editing by Mark Bendeich)